M.

Arslan Mumtaz
CORPORATE FINANCE Sap ID 70077842 MBA
FROZEN FOOD ASSIGNMENT Corporate Finance

QUESTIONS
FREE CASH FLOW TO THE FIRM?
NPV OF EXPECTED CASH FLOWS?
FIND SUITABLE DISCOUNT RATE?
COST OF CAPITAL?
Total Cash Investment 14000
SOLUTION
Formula = Net Income+Depriciation+Interest(1-tax rate)+change in Working Capital-Capital Expenditure
FREE CAS FLOWS FOR NEXT FIVE
Part -A YEARS 1 2 3 4 5 6 7 8 9 10
Change
Net Income 655 756 862 973 1088 1142.4 1199.52 1259.496 1322.4708 1388.59434
add Depriciation 900 945 983 1016 1043 1095.15 1149.9075 1207.402875 1267.773019 1331.16167 0 1 2 3 4 5 6 7 8 9 10
Interest 165 175 185 194 202 212.1 222.705 233.84025 245.5322625 257.808876
add interest(1-tax rate) 116 123 130 136 141 127 134 140 147 155 2000 2200 2450 2700 2950 3200 3360 3528 3704.4 3889.62 4084.101
add Change in WC 200 250 250 250 250 160 168 176 185 194 200 250 250 250 250 160 168 176.4 185.2 194.5
Minus Capital expenditure 7,200 8,400 9,600 10,800 12000 13200 14400 15600 16800 18000
= Free Cash Flow to Company 5,329.5 6,326.5 7,375.5 8,425.2 9,477.6 10,675.2 11,748.9 12,816.4 13,877.2 14,931.1

5.00%

Q-which is the appropriate rate for discounting FCFF value profitability of the project and how
Part -B to estimate it?

Total Cash Investment 14000

Years 1 2 3 4 5 6 7 8 9 10
FCFF 5329.5 6326.5 7375.5 8425.2 9477.6 10675.19 11748.9495 12816.396975 13877.21682 14931.07766

Terminal Value CF1(1+r)^1+CF2(1+r)^2+CF3(1+r)^

3+CF4(1+r)^4+CF5(1+r)^5
Capital expenditure change
Terminal Value 135,879.96
6000 7,200 8,400 9,600 10,800 12000 13,200 14,400 15,600 16,800 18,000
TV/PV=(1+r)^n 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200
T.V 135,879.96
Initial Cash Flow=PV 14000
TV/PV 1.26
(1+r)^5*1/5 1.1022
1+r 1.1022
r 0.26
"r" in % 25.517%

The wacc of the project should be lower than the Internal Rate of
Return (IRR) in order to have a profitability. So the IRR is 25.517%
which is good for the discounting for the profitability values.

Part -C
Levered Beta/1+(1-
Unlevered Beta Tax)*(Debt/Equity)
Unlevered
Companies Equity Debt Levered BETA
Betas
Advanta India Ltd. 3,744.20 5,738.30 0.5472 0.26
Britania Industries Ltd. 5,200.40 281.50 0.2638 0.25
GSK 11,441.80 - 0.0959 0.10
Jubilant 2,995.50 - 0.9856 0.99
Kwality Dairy 910.50 4248 0.6357 0.15
Rei Agro 23,611.80 38,540.50 0.5393 0.25
Venky's (India) 3,157.90 985.70 0.6690 0.55
Zydua Wellness 1,868.60 - 0.5372 0.54
 Average
Unlevered BETA 0.38583

1/3 is the Ratio

of Equity and
Levered Beta from Unlevereged Beta Average Unlevered Beta/1+(1- Debt Given in the
for Equity tax)*(1/3) Case

Levered Beta 0.47

Debt 1 25%
Ratios
Equity 3 75%
WACC (cost of equity*%of equity)+(cost of debt*%of debt)*(1-tax rate)
risk free rate + Beta*market risk
CAPM
premium
risk free rate 8%
Risk Premium 8%
Levered Beta 0.47
cost of equity 11.76000%
Cost of Equity Cost of Debt
TOTAL WACC
8.82000% 1.400% 10.22000%
cost of debt Interest rate*(1-tax rate)
interest rate 8%
tax rate 30%
Cost of Debt 5.600%

Determine the terminal Value of the project after 5 years assuming that FCFF will grow perpetually at the rate of
Part -D 5% per year?

Solution
Years 1 2 3 4 5 6 7 8 9 10
FCFF 5329.5 6326.5 7375.5 8425.2 9477.6 10675.19 11748.95 12816.397 13877.2168238 14931.07766

Terminal Value
CF1(1+r)^1+CF2(1+r)^2+CF3(1+r)^3+CF4(1+r)^4+CF5(1+r)^5
121588.525512321

Part -E Estimate NPV of the Project

Wacc 10.22%

CF0+CF1/(1+WACC)1+CF2/(1+WACC)2+CF3/(1+WACC)3+CF4/
NPV (1+WACC)4+CF5/(1+WACC)5

NPV 156184.08136746 Answer